Amendments to the EU Parent Subsidiary Directive

Impact on Ireland

ECOFIN held a meeting in Luxembourg on 20 June 2014 where the Council agreed to a proposal for a Council Directive amending the Parent-Subsidiary Directive (2011/96/EU), in order to prevent the double non-taxation of corporate groups as a result of hybrid loan arrangements.

The Council agreed to the amendments regarding the new rule on hybrid loans in order to allow for an early adoption of the new rule. Member States will have until 31 December 2015 to transpose it into national law.  It was further agreed to continue the work on possible amendments to the General Anti-Avoidance Rule of the Parent Subsidiary Directive.

This change to the Parent Subsidiary Directive, while not of a direct impact on Ireland due to the fact that Ireland does not currently grant an exemption for profit distributions from subsidiary companies in other Member States (but rather provides credit relief as an alternative), may have an impact on certain Irish s110 structures in the context of the taxability of interest receipts in foreign jurisdictions.


On 25 November 2013, the European Commission presented a proposed amendment to the Parent- Subsidiary Directive (“PSD”) with the following two primary aims;

1. Extinguishing loopholes in the current Directive which facilitate double non-taxation via hybrid financial mismatches

2. The introduction of a general anti-abuse rule (GAAR) in order to protect the overall functioning of the PSD.

The Presidency noted a large support in order to tackle double non-taxation via hybrid financial mismatches but indicated that the introduction of a general anti-abuse rule will require further discussion since so far different views have been expressed by Member States and several Member States have raised concerns on this part of the proposal. Therefore, the original amendment has split into two parts to ensure early adoption of the hybrid loan amendments to tackle double non-taxation and retain GAAR amendments for further discussion in the future.

The Directive exempts dividends and other profit distributions paid by subsidiary companies to their parent companies from withholding taxes and eliminates double taxation of such income at the level of the parent company.

Double non-taxation can arise through hybrid financial mismatches whereby the subsidiary making a dividend or other profit distribution to its parent company receives a tax deduction (e.g. where the payment is treated as interest at the subsidiary level) and the recipient parent company exempts the payment received from tax on the basis of the PSD as currently in force.

What has changed

The Council agreed to an amendment to EU tax rules in order to prevent the double non-taxation of corporate groups deriving from hybrid loan arrangements. The aim is to close the loophole that currently allows corporate groups to exploit mismatches between national tax rules so as to avoid paying taxes on some types of profits distributed within the group.

To effect the required change to the PSD, Article 4 Paragraph 1(a) has been amended such that the State of the parent company, which by virtue of its association with its subsidiary (i.e. by virtue of its shareholding in the subsidiary company), receives distributed profits, shall now only refrain from taxing such profits to the extent that such profits are not deductible by the subsidiary and shall tax such profits to the extent that such profits are deductible by the subsidiary.

Impact on Ireland

Generally speaking this amendment to the PSD should not have any direct impact on Ireland given the fact that under Irish domestic law provisions dealing with the implementation of the PSD, no exemption is currently granted for profit distributions received from subsidiaries in other Member States. Rather, credit relief is available for withholding tax suffered and other types of foreign tax borne by the subsidiary making the distribution.

However, the changes to the PSD could potentially have an impact on certain structures involving Irish s110 securitisation vehicles.

Potential impact on structures involving s110 qualifying companies

Generally speaking, in order for a s110 company to obtain a deduction in Ireland for Profit Participating Note (“PPN”) interest paid to a company tax resident in a foreign jurisdiction, there is a requirement that the interest must be subject (without any reduction computed by reference to the amount of such interest or other distribution) to a tax which generally applies to profits, income or gains received in that territory from sources outside that territory. Therefore there should be no mismatch in tax treatment as no deduction would be available in Ireland where the interest receipt is not subject to tax in the foreign jurisdiction. Therefore, at first glance, the PSD amendment should have no impact.

However, there are some exceptions to this general rule that the interest must be subject to tax in the foreign jurisdiction before a deduction is allowed to a s110 company for PPN interest, namely;

1.Certain s110 structures are grandfathered from the application of the revised “subject to tax” rules that were introduced by Finance Act 2011. Broadly speaking, PPN interest paid in respect of debt notes that were issued before 21 January 2011 continue to qualify for a deduction under Irish tax rules, regardless of whether the interest is subject to tax in the recipient jurisdiction.

2. Where the PPN on which the interest is being paid by the s110 is a “Quoted Eurobond” or “Wholesale Debt Instrument” and is not being paid to a “specified person” (as defined in Irish tax law), the fact that the PPN interest is not subject to tax does not impact on the deductibility in Ireland.

In these situations it is possible that a deduction for PPN interest would be available in Ireland even where such interest payment is regarded as an exempt dividend in the recipient jurisdiction under the PSD. Under the revised PSD, it would appear that, where the recipient jurisdiction is another EU Member State, that jurisdiction would be obliged, where the PPN interest is exempt in such country because of the PSD, to tax such income given that a deduction is available under Irish tax law. It should be borne in mind however that the bilateral Double Tax Treaty between Ireland and the relevant recipient country should also be considered in establishing the recipient company’s right to tax the receipt.


The agreed amendments to the PSD should not have a direct impact on Ireland, however it may have an indirect impact on the overall tax efficiency of structures that have been put in place involving Irish s110 companies. Existing s110 structures should be reviewed to establish any potential impact under the revised PSD, especially in circumstances where PPN interest is currently exempt from tax in the recipient jurisdiction as a result of the PSD and where that recipient jurisdiction is an EU Member State.

Please contact a member of our Financial Services tax team for further details regarding the application of the PSD amendments in a s110 context.

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